Why did WellPoint buy 1-800-Contacts?

Some folks are scratching their heads over health insurer WellPoint’s plan to spend $900 million to buy 1-800-Contacts, a retailer of eyeglasses and contact lenses. The decision is not really so surprising, for a few reasons:

Some folks are scratching their heads over health insurer WellPoint’s plan to spend $900 million to buy 1-800-Contacts, a retailer of eyeglasses and contact lenses. The decision is not really so surprising, for a few reasons:

Under the Affordable Care Act, profit margins for health plans are essentially regulated by the minimum medical loss ratio rules. If WellPoint makes too much money in its core business it has to issue a rebate. If 1-800-Contacts is especially profitable, WellPoint gets to hold on to the profits

Vision care is a pretty close cousin of medical care. Adjacent markets are going to be a lot more comfortable for managers as they venture out from the core

WellPoint has plenty of cash. The $900 million purchase price will essentially be paid by writing a check. If things go South it won’t crater WellPoint, but the deal is still big enough to be interesting

1-800-Contacts has retail experience. WellPoint is preparing to expand its presence in the individual health insurance market, a market that is likely to grow as the Affordable Care Act is implemented, and may even grow even if the law is thrown out or repealed. Don’t be surprised to see more retail storefronts and online sites selling health insurance. Vision benefits are a part of that, and whatever WellPoint can learn from 1-800-Contacts has an opportunity to be applied over a large customer base

I don’t view it as a very exciting deal, but the logic is solid enough.